Financing Higher Education

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It’s never too early or too late to start planning for your children’s education after high school. The earlier you adopt a savings plan, the more options you have for building that nest egg to pay for college or vocational school. But even if your child is approaching high school graduation, it’s not too late to plan how best to use your resources. For example, in addition to savings, there are a number of lower-cost educational loan plans in which the parents or student may participate.

Savings Plans

Savings are a primary source for paying college or vocational school tuition and expenses. Savings plans can take many forms, and they can be started by a parent, child (or prospective student), relatives and friends. Here is an overview of a few of the many savings options, including the potential tax benefits or other benefits each may offer.

• Coverdell Education Savings Accounts (formerly Education IRAs). These tax-free savings plans may be set up for a minor child to pay qualified education expenses for the designated beneficiary. A maximum of $2,000 each year can be contributed per year to the account up until the child reaches 18 years of age. Contributions are limited by the giver’s modified adjusted gross income. The fund must be used to pay for qualified expenses by the time the beneficiary reaches age 30. Such “distributions” can be used to cover qualified expenses for both elementary/secondary education and higher education. The fact that the account must be in the child’s name can affect the child’s eligibility for financial aid.


• State-sponsored 529 Plans. Every state in the U.S. offers at least one of these college savings programs, which are established in the name of the beneficiary and which provide tax-free growth. No federal income tax is owed when a distribution is made for the beneficiary’s college costs. Although the plan is state sponsored, the funds may be used at any accredited college or university in the country. A 529 Plan has several benefits. First, it’s an easy account to manage because the donor simply determines a monthly contribution; like a mutual fund, the investment is handled by the plan managers. Second, the maximum amount that can be saved is large. Although monthly contributions can be as small as $50 per month, the total amounts that can be contributed can be large, as much as $200,000 or more per beneficiary in some states. Also, there are no income or age restrictions. The College Savings Plans Network has information about each state plan.


• Education Bond Program. This US Treasury Department program allows interest to be completely or partially excluded from Federal income tax. The bond owner must pay tuition and fees at a college, university, or vocational school or pay into a State tuition plan in the same calendar year that the bonds are redeemed. Series EE bonds issued after January 1990 and all Series I bonds are eligible. You don’t need to indicate that you plan to use the bonds for education when you buy them but you must meet the program requirements. For more information about these bonds, check out the Education Planning web page of the TreasuryDirect site.


• Prepaid Tuition Plans. These are state-sponsored college savings plans that allow you to buy tuition units. This means that if you buy units for one semester (or quarter) now, the units will still pay for one semester (or quarter) when your child goes to college. Previously, these plans locked you into state schools but with the advent of the 529 plans, there is a little more flexibility.

Scholarships, Grants, Loans and Other Financial Aid Options

With higher education costs continuing to rise, most families will need more than savings to finance a child’s continuing education. According to college admissions professionals, many families mistakenly assume when their child applies to colleges that they can’t qualify for financial aid. These experts strongly recommend that every applicant and his or her family always complete the financial aid application. Financial Aid Offices in most colleges and universities are happy to work with prospective students to put together a package of aid that draws on not only on scholarships and the institutions private resources but on government grants and loans and other outside resources. Also be sure to check out what options Educators offers.

FAFSA: Free Application for Federal Student Aid …and more

The U.S. government provides a number of grant and loan programs to help finance higher education. To apply for any federal aid program, prospective students and their families must submit the Free Application for Federal Student Aid (FAFSA), which is used to determine what federal aid a student may be eligible for. Most schools also require that applicants for financial aid complete this form.

Many colleges also use the federal FAFSA form as part of the financial application process not just to qualify students for federal grants and loans but for their own scholarship and financial aid programs.

There is no fee to file the FAFSA. It must be filed only once and preferably should be submitted online (over 90% of FAFSA applications are submitted online). The FAFSA website also provides information and aids for completing the form. If you prefer using paper forms (a much slower process), such forms are available from the Financial Aid Office of individual schools and from the Federal Student Aid Information Center 1-800-4-FED-AID (1-800-433-3243).

Scholarships

Scholarships come to mind first when thinking about financial aid for higher education. Several billion dollars are available annually in scholarship funds from a wide variety of sources. Consult our article on “Researching Scholarships” for more information on this option.

U.S. Government Financial Aid Programs

Federal financial aid programs include the following grants and loans. Some programs are applied for through the individual school and others may be applied for directly. But it’s important to note that an individual school may not participate in all the programs—another reason to work with the school’s Financial Aid Office.

• Federal Pell Grants
  This program provides grants that do not have to be repaid. They are available for undergraduates only. Applications are submitted through the individual school.
• Federal Stafford Loans
  These loans are available to undergraduate and graduate students, and loan eligibility increases for each subsequent year of study. Stafford loans may be obtained directly from the federal government (Direct Loan program) or from a private lender such as your credit union. The federal government guarantees the loan funds. Loans disbursed after July 1, 2006 have a fixed interest rate of 6.8%. Loans disbursed between July 1, 1998 and June 30, 2006 have a variable interest rate that can not exceed 8.25%. If you qualify for a subsidized Stafford loan, the government will pay the interest on your loan while you are in school. If you have an unsubsidized Stafford loan, you are responsible for paying all the interest that accrues. The school or lending institution determines whether you qualify for subsidized or unsubsidized loan based on financial status. An individual who receives a subsidized loan may also get an unsubsidized loan.
• Federal PLUS Loans
  These unsubsidized loans are made to parents by private lending institutions such as your credit union. For these loans disbursed on or after July 1, 2006 the interest rate is fixed at 7.90% for loans directly from the U.S. Department of Education and 8.5% for a loan through a private lender.
• Federal Supplemental Educational Opportunity Grants (SEOG)
  These grants, which do not have to be repaid, range from $100 to $4,000 per year for students who remain eligible and are only available for undergraduates. The participating school administers the program and receives the application.
• Federal Work Study
  This program provides jobs for undergraduate and graduate students. The money earned is applied to education expenses. The participating school administers the program and receives the application.
• Perkins Loans
  These are low interest (5% APR) loans administered by the individual school. Undergraduates can borrow up to $4,000 annually and graduate students can borrow up to $6,000 annually.

For additional information about federal programs, you may wish to consult “Funding Education Beyond High School,” a publication prepared by the government and available online.

Private Loans

In addition to government-supported loans, you may take out education loans from financial institutions. These loans may provide more flexibility (repayment, loan amounts) than federal loans. A smart consumer will check out what several lenders offer since they will be different. The offerings may also vary according to your child’s level of study.

Educators offers an Education Loan which can be used to help finance higher education and post graduate studies. Any student seeking a degree at an accredited school can apply and choose from one of two repayment options: regular installment payments or a 12-month balloon loan (with deferred payments). The annual borrowing maximum for an Education Loan is $25,000 (up to cost of education less financial aid) with an aggregate maximum of $100,000 per student. The checks must be made payable to the school. There are no fees for origination, disbursement or repayment. The rate on the Education Loan is fixed at 8.9% APR (Annual Percentage Rate).

One of the most popular uses for home equity loans is to finance education expenses. Interest is tax deductible for most people (federal and sometimes state) which can lower the real cost. Educators offers home equity loans.

Information on Other Sources of Financial Aid

Beyond the basic sources of financial aid described in this article, there are many other options. Sources of financial aid run the gamut from free scholarship lotteries, to aid from your specific school, to national service, to meeting specific criteria (such as female, older, minority). Check out the FinAid! web site for more information.

Prepared by Remar Sutton and Associates and licensed to Educators Credit Union. Copyright 2007. All rights reserved.

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